What exactly has been agreed?
For a century and more, multinational companies have paid tax in the jurisdiction where they are based. That’s the simplest system. But as the world economy globalised, it has increasingly fostered a complex web of ownership structures, tax havens and other jurisdiction-hopping that lets profit-making machines pay nugatory corporate taxes in places where they do lots of business. That strikes many people as unfair. There are two parts to the changes agreed by the G7. First, the 100 biggest global companies with profit margins of at least 10% will henceforth have to pay tax on 20% of profits (above the 10% margin) in the countries where they make sales, rather than where they are legally registered. Second, there’ll be an agreed global minimum rate (for countries that agree) of “at least” 15% corporation tax on overseas profits, together with ancillary measures that wipe out the advantages of shifting profits to low-tax jurisdictions. The details have yet to be thrashed out, and the deal faces a fierce battle to get through national legislatures. But these are potentially historic changes.
Why has this happened now?
The pandemic has seen many rich-country governments scrambling to deal with plunging revenues and ballooning deficits, while tech firms have enjoyed a working-from-home surge in profits. That concentrated minds in Europe. Silicon Valley giants such as Facebook and Google have been criticised for years for paying minimal taxes in markets where they book billions of dollars in sales, says The Times. Campaign group TaxWatch estimates that tech giants avoided £1.5bn of UK taxes in 2019. But the crucial factor is the departure of the unilateralist US president Donald Trump and the arrival of Joe Biden.
What’s Biden’s plan?
He is determined to drive up the corporate tax-take to help fund his $6trn spending plans. Biden originally wanted a 20% global minimum, in the hopes that a sufficiently high level would shield the US economy from the potentially anticompetitive consequences of his planned rise in corporate taxes from 21% to 28%. What we are seeing is a trade-off, says Irwin Stelzer in The Sunday Times. The rich nations are heading towards a global tax regime “in which America will allow foreigners to tax US companies, without tariff retaliation, in return for an agreement from other countries to a minimum tax rate that allows Biden to proceed with the construction of a European-style, expansive welfare state in America”.
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Will it work?
Some sceptics worry that higher corporate taxes simply mean higher prices for consumers. And the proposals are actually pretty modest as they stand, since the way they are framed doesn’t even catch Amazon in the net (its profit rate is less than 10%) and the proposed new global minimum tax rate of 15% is low. Indeed, within the OECD club of rich nations, only Ireland (12.5%), Chile (10%) and Hungary (9%) currently set corporate tax rates lower than that. Expectations of a massive tax windfall are therefore misplaced, says Lex in the Financial Times. EU multinationals would have to pay about €50bn or 15% extra in global taxes, according to the Paris-based EU Tax Observatory. Similarly, the UK would collect an extra £7.9bn, according to the IPPR think-tank. But “such estimates look overblown”. Scaling up an earlier OECD estimate suggests extra revenues of less than 4%, or $84bn, the biggest share of which would be paid by tech giants and other US multinationals to the US government.
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Who wins from all this?
The direct macroeconomic benefits of the deal look limited, says Simon MacAdam of Capital Economics. What makes it so important is that “wealthy nations have found renewed determination under a Biden presidency to cooperate on global issues, which may pay dividends in other areas in years to come”. For the rich G7 to agree in principle to give up some tax sovereignty is a genuine milestone, in that it signals a willingness to work together more smoothly on global issues. “Against this backdrop, trade disputes among Western allies are less likely, and coordinated action to tackle climate change is more probable.”
Who loses?
There’ll be an impact on low-tax European jurisdictions such as Ireland, Hungary, and Cyprus, though it won’t be seismic: 15% is still a very low rate by global standards. But where things look really bleak is in the “palm-fringed” tax havens such as Bermuda, the British Virgin Islands and the Cayman Islands, says The Economist. The proposed deal “would blow up” these zero-tax territories’ whole business model as it applies to corporates. They may not make anything in direct corporation tax revenues, but do depend on fees from subsidiaries of large companies and the “cottage industry” of accountants, lawyers and other providers that serve them. Some such jurisdictions have other revenue streams at least. But even so “they are livid” about the G7 plan – and “there’s nothing they can do”.
What about financial markets?
The new deal will cost $50bn-$80bn a year in additional tax receipts for the world’s largest multinationals, say Yanmei Xie and Udith Sikand of Gavekal Research. Yet big tech stocks were not much moved by the announcement. And, counterintuitively, the agreement may even prove positive at the margin for global equities beyond the “mega-cap” segment. That’s because, even though the agreement “will be negative for the earnings of the big tech and big pharma companies which have made most use of profit-shifting techniques”, the deal will avert the brewing transatlantic trade war over digital taxes. Longer term, though, there’s more for investors to fear. After all, “reduced tax competition between national governments can hardly be healthy for equities”.
